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The collapse of SVB exposes the largest crack in the economy

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Re: The collapse of SVB exposes the largest crack in the economy

#191

Post by rcme »

I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed created expectations that interest rates had a reasonable chance of staying 0 for the next decade. This blame falls squarely with Powell. He lowered rates in 2019, well before the pandemic. Who can blame someone for seeing near-0 rates in 2019 and believing they would stay that way well into the 2020s?

Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.

Re: The collapse of SVB exposes the largest crack in the economy

#193

Post by notpeter »

astrange wrote: post #118
SideburnsOfDoom wrote: post #89

Earlier quoted context omitted.

> In 2008 we learned "cartolarization" Did we? So what the hell is it?

Italian-English for securitization?

I think you got it. cartolarization ~= cartolari(zzazione) + (securiti)zation.

https://it.wikipedia.org/wiki/Cartolarizzazione

Re: The collapse of SVB exposes the largest crack in the economy

#194

Post by JackFr »

TooSmugToFail wrote: post #2

SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion. Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable. European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leve…

Agree.

SVB was not small, but an order of magnitude smaller than the large money center banks (Citi, BofA, JPMChase).

That being said, nearly every other bank of that size submitted Dodd Frank Stress Test results to the Fed in 2022.

https://www.federalreserve.gov/publications/files/2022-dfast...

Somehow SVB avoided this. I don’t see this as systemic at all. The FDIC will make depositors whole and the owners and managers did a bad job and they lose. The worst possible response would be a bailout of any sort beyond ordinary FDIC receivership.

Re: The collapse of SVB exposes the largest crack in the economy

#195

Post by phlakaton »

rcme wrote: post #191

I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed create…

So I would say it's safe in one way (if you hold it to the end, you'll get your money back plus interest), unsafe in another (its value on the market before then is not guaranteed).

I disagree that the Fed set an expectation for indeterminate 0% interest. I'm sure that's what sugar addicts in the market told themselves, but I think the Fed was clearly, if gingerly, trying to dig themselves out of a 0% hole, having started to raise rates again in 2015. As they should have been!

Re: The collapse of SVB exposes the largest crack in the economy

#196

Post by testfoobar »

teacpde wrote: post #76
testfoobar wrote: post #30

Earlier quoted context omitted.

SVB failed to hedge their interest rate risk.

Curious what are the ways SVB could have hedged in this scenario?

Interest rate swaps is one solution.

Here is a primer: https://www.pimco.com/gbl/en/resources/education/understandi...

This is another (PDF): https://www.treasurer.ca.gov/cdiac/publications/math.pdf

Re: The collapse of SVB exposes the largest crack in the economy

#197

Post by nradov »

morelisp wrote: post #70
bequanna wrote: post #54

Earlier quoted context omitted.

Please name one “banking innovation” the banking industry has implemented in the last decade which has benefitted consumers.

VCs and founders must believe SVB offers at least one, or why not go with a normal bank?

SVB was a normal bank. They specifically targeted tech industry startups through relationships with VCs and founders, but there was nothing special about the banking side.

Re: The collapse of SVB exposes the largest crack in the economy

#198

Post by anonporridge »

phkahler wrote: post #32
PKop wrote: post #19

Earlier quoted context omitted.

Literally funds the government lol

Taxes fund the government. Bonds are just a way to avoid managing a budget.

Na, taxes create demand for currency, which maintains the currency's value. Then you just print or borrow the currency into existence to fund the government.

People are forced to acquire the currency to pay their taxes or risk being assaulted by the violence of state and dispossessed of a lot of their stuff and/or freedom.

Re: The collapse of SVB exposes the largest crack in the economy

#199

Post by nradov »

saurik wrote: post #124
morelisp wrote: post #70

Earlier quoted context omitted.

VCs and founders must believe SVB offers at least one, or why not go with a normal bank?

And how did that work out for them? Are many of the people who were using SVB yesterday happy about their decision today? If they could go back in time and give up whatever that innovation was, and not be praying that they still have their money next week, are you saying most of them would be happy where they are? The problem here is that the system just isn't transparent enough: you put your money in a bank and I gu…

The system is sufficient transparent. SVB was a publicly traded company. Customers who cared about risk could just read the reports. In the end any bank can fail.

https://ir.svb.com/financials/sec-filings/default.aspx

The depositors will get their money back, with perhaps a small delay. Which is more than you can say for scams like cryptocurrency.

Re: The collapse of SVB exposes the largest crack in the economy

#200

Post by JackFr »

andrepd wrote: post #185
phkahler wrote: post #140

Earlier quoted context omitted.

>> government doesn't need taxes to fund anything, it can just create money and sell bonds. This is a nice fiction a lot of people spout. The consequences of that are inflation or default. Inflation is very unpopular but defaulting ends the game because investors won't buy the bonds after that. There are consequences to ignoring debt.

My country has an 8% budget surplus before interest payments, and 2% deficit after. What would be the consequences of ignoring/defaulting on that debt exactly? Seeing as how it's already doing fine with an 8% surplus. I can think of other (political) consequences, but not economical per se, if you assume that a loan has a risk of default priced into its interest rate.

The obvious consequence of defaulting in your debt is that it becomes difficult to go to the capital markets in the future if you need to.

Probably more politically disastrous is that if the debt is denominated in the domestic currency, it’s likely that a substantial portion of the bond holders are domestic and they will not be happy about having their wealth confiscated.

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